Union Budget 2021: Abolish tax on dividends for retail investors to consider equity investments

Govt need to ease tax burden. Scott Graham/Unsplash

The year 2020 has brought unprecedented upheaval in the lives of people and businesses across the globe. For the investor community too it was a time of volatility and uncertainty. While the world is warming up and adjusting to the new normal, many people and businesses are still reeling from the economic impact of COVID-19 . With the Union Budget 2021-2022 announcement some hours away, here are some expectations from retail investors for this year’s Budget.

Equity-related mutual funds

Indexation assists investors in paying taxes on the real value of the investments as compared to the nominal value. At present, the government offers indexation benefits for gold investments, debt mutual funds, and real estate. However, equity-related funds are not eligible to be considered. From 2018, Long-term Capital Gains (LTCG) is taxed at 10 percent sans any indexation benefits. While the LTCG up to Rs 1 lakh is exempted from tax every year, the impact on the tax liability is not substantial. Also, this rule incentivises investors to book profits every year as opposed to staying invested for a longer period.

NPS Tax-saver to all investors

Last year, the Union Budget announced the launch of Tier-II of the National Pension Scheme (NPS). This had a shorter lock-in period when compared to the Tier-I lock-in requirement of up to retirement. However, Tier-II NPS funds were only made available to government employees.  After reducing the lock-in requirement, NPS funds can be compared with the Equity Linked Savings Scheme (ELSS) schemes. Hence, investors expect the government to make Tier –II available to all retail investors to give them an additional option of investing in a tax-saving equity-related fund.

Tax on dividends

In 2020, interest rates dropped, and several investors felt a significant strain on their fixed, regular income. Moreover, the government had scrapped the Dividend Distribution Tax (DDT) and made dividends taxable for all investors. Given the current state of the pandemic-hit economy, investors require an avenue to boost the fixed income section of their portfolios that can be easily replaced by equity shares of companies that have a history of offering good dividends. If the Budget manages to abolish tax on dividends or re-introduce DDT, then retail investors might start looking at equity investments for dividends as a replacement for fixed income too.

The Union Budget 2021-2022 will be the first one in the post-COVID world and the industry will be expecting concrete measures from the government in favour of a fast-tracked revival process for the economy. Particularly sectors such as retail, travel, tourism, and aviation, are facing an urgent need of a speedy recovery process in order to bounce back to normalcy. Increased and continuous support from the government in terms of enhanced infrastructure, enabling complete digitisation, and eradication of the aforementioned taxes will ensure that the Indian economy’s revival is well underway.

The writer is Co-Founder and COO, Groww